Tackling tax fraud: Commission proposes stronger cooperation with non-EU countries on VAT
As part of the fight against tax fraud, the Commission has today asked for a mandate to negotiate VAT administrative cooperation agreements in with Russia and Norway.

An estimated €193 billion in VAT revenues (1.5% of GDP) was lost due to non-compliance or non-collection in 2011. While this loss is attributed to a mix of different factors, VAT fraud is certainly an important contributor.

Cooperation agreements with the EU’s neighbours and trading partners would improve Member States’ chances of identifying and clamping down on VAT fraud, and would stem the financial losses this causes. (See EC Press 6/2/2014).

Balkans.com Business News Correspondent – 07.02.2014

As part of the intensified battle against tax fraud, the Commission today launched the process to start negotiations with Russia and Norway on administrative cooperation agreements in the area of Value Added Tax (VAT). The broad goal of these agreements would be to establish a framework of mutual assistance in combatting cross-border VAT fraud and in helping each country recover the VAT it is due. VAT fraud involving third-country operators is particularly a risk in the telecoms and e-services sectors. Given the growth of these sectors, more effective tools to fight such fraud are essential to protect public budgets. Cooperation agreements with the EU’s neighbours and trading partners would improve Member States’ chances of identifying and clamping down on VAT fraud, and would stem the financial losses this causes. The Commission is therefore asking Member States for a mandate to start such negotiations with Russia and Norway, while continuing exploratory talks with a number of other important international partners.

Algirdas Šemeta, Commissioner for Taxation, said: “The supply chain has evolved dramatically since VAT was first implemented in the EU. Globalisation and e-commerce open up new windows of opportunity, but also create new risks. Fraudsters play on cross-border differences and information gaps between countries. The EU needs to work hand-in-hand with its international partners if it is to successfully combat VAT fraud. That is what the Commission is proposing today, with a request for negotiating mandates to formalise this cooperation.”

The cooperation agreement would be based on the Regulation on administrative cooperation in the field of VAT, which currently sets the framework for intra-EU collaboration in this area. Among the ways in which Member States cooperate against VAT fraud are by allowing each other access to their data bases, and exchanging information (either automatically or on request) on taxpayers’ activities. Eurofisc is also a very effective network for Member States to exchange information and intelligence on VAT fraud.

The use of such instruments could be extended to third countries through cooperation agreements against VAT fraud. The EU intends to negotiate such agreements with neighbouring countries, its main commercial partners and countries to be considered leaders in the field of electronically supplied services. For now, exploratory talks have been initiated with Norway, Russia, Canada, Turkey and China. Both Norway and Russia have already indicated that they are now ready to start official negotiations.

A proposal for a Quick Reaction Mechanism (QRM), that would enable Member States to respond more swiftly and efficiently to VAT fraud, was adopted by the Commission today.

Under the QRM, a Member State faced with a serious case of sudden and massive VAT fraud would be able to implement certain emergency measures, in a way which they are currently not allowed to under VAT legislation.

In this context, the proposal provides that Member States would be able to apply, within the space of a month, a “reverse charge mechanism” which makes the recipient rather than the supplier of the goods or services liable for VAT.

This would significantly improve their chances of effectively tackling complex fraud schemes, such as carrousel fraud, and of reducing otherwise irreparable financial losses.

In order to deal with possible new forms of fraud in the future, it is also foreseen that other anti-fraud measures could be authorised and established under the QRM.

Algirdas Šemeta, Commissioner for Taxation, Customs and Anti-Fraud, said: “When it comes to VAT fraud, time is money. Fraudsters have become quicker and cleverer in developing schemes to rob the public purse. We must strive to be one step ahead of them. The Quick Reaction Mechanism will ensure that our system is sufficiently equipped to tackle VAT fraud effectively. It will help preserve much needed public revenues and create a fair and level-playing field for honest businesses.”

VAT fraud costs the EU and national budgets several billion euro every year. In some serious cases, vast sums are lost within a very short timeframe, due to the speed at which fraud schemes evolve nowadays. For example, between June 2008 and December 2009, an estimated €5 billion was lost as a result of VAT fraud in greenhouse gas emission allowances.

Currently, if a Member State wishes to counteract VAT fraud through measures not provided for under EU VAT legislation, it must formally request a derogation to do so.

The Commission then draws up a proposal to this effect and submits it to Council for unanimous adoption before the measures can be implemented.

This process can be slow and cumbersome, delaying the Member State in question from taking the necessary action to stop the fraud.

With the Quick Reaction Mechanism, Member States would no longer have to wait for this formal process to be completed before applying specific anti-fraud measures. Instead, a much faster procedure would grant them a temporary derogation within a month. The derogation would be valid for up to one year.

This would allow the Member State in question to begin counteracting the fraud nearly immediately, while more permanent measures are being established (and if necessary while the standard derogation procedure is being launched).

Background

The Quick Reaction Mechanism was foreseen in the new VAT Strategy (see IP/11/508), as well as the Communication on fighting tax fraud and evasion (seeIP/12/697), as a means of strengthening the fight against tax fraud in the EU and safeguarding public revenues.

How much is lost every year because of VAT fraud?

Although, due to the very nature of fraud, it is difficult to put a precise figure on VAT losses due to fraud, it is thought to be several billion euro each year. In a study on the EU VAT gap1, the Commission compared what Member States actually got in VAT receipts with what they could have expected.

While this VAT gap covers more than just fraud (also legal avoidance and insolvencies), the study set the gap at €106.7 billion in 2006 within the EU-25.

This represents an average of 12% of the net theoretical liability although several Member States were above 20%.

VAT fraud does not only affect the financial interests of the Member States and the EU.

It also has an impact on honest businesses which find themselves unable to compete on a level playing field in those sectors which are affected by a significant amount of VAT fraud.

What has the Commission done to address the problem of VAT fraud?

In 2006 the Commission presented a Communication to launch an in depth discussion at EU level on the need for a co-ordinated approach in the fight against fiscal fraud in the internal market. In 2008, the Commission set out a coordinated strategy to improve the fight against VAT fraud in the EU.

This Strategy included a series of targeted measures, including plans for legislative proposals (which have now all been put forward), and a longer-term reflection on how to fight the problem.

One key element was to see how administrative cooperation between tax administrations could be improved, and to establish a network of national officials to detect and combat new cases of cross-border VAT fraud.

This network – Eurofisc – is now operational and working to coordinate data exchange and establish an early warning mechanism against fraud.

What further measures to tackle VAT fraud does the Commission foresee?

In its Communication on the future of VAT, which it presented in December 2011 (IP/11/1508), the Commission set out priority actions needed to create a simpler, more efficient and more robust VAT system in the EU.

One of the overriding objectives for the new VAT system was to tackle VAT fraud more effectively, and a number of ideas were laid out on how to achieve this.

First, the Commission intends to monitor the full implementation of the abovementioned Anti-Fraud Strategy, making sure that all instruments in place against fraud are functioning to full potential.

It will examine ways to extend the automated access to information, and will assess whether anti-fraud mechanisms, such as Eurofisc, need to be strengthened. In 2014, it will report on whether further action is needed to strengthen or complement these measures.

In addition, the Commission will embark on a number of new anti-fraud projects.

The Quick Reaction Mechanism, proposed today, was one such initiative. In addition, the Commission launched the idea of setting up a EU cross border audit team composed of experts from national tax authorities to facilitate and improve multilateral controls.

As the success of any anti-fraud measure depends directly on the administrative capacity of the national tax authorities, the Commission will intensify its monitoring of the efficiency and effectiveness of the tax administrations of the Member States.

In the Commission’s Country Specific Recommendations for 2012, adopted by the Council in June, 10 Member States2 were told to improve tax compliance and collection. The Commission will also encourage the exchange of best practices in combating fraud in high risk sectors.

What is carousel fraud?

Carousel fraud is one of the most common types of large-scale VAT fraud schemes in the EU. Under EU legislation VAT on domestic sales is generally due by the seller while VAT on cross border sales is generally due by the purchasing companies.

In carousel fraud schemes, fraudsters import goods to a Member State VAT-free, and then charge VAT to the buyers. The sellers then disappear without paying the tax to the authorities, while the buyers deduct the VAT they paid from their overall taxable income, thus creating a loss to public finances.

It is called carousel fraud because there are usually a number of companies involved, each liable to VAT which goes unpaid, and the final buyer reclaims the VAT from the tax authorities before disappearing.

What is the “reverse charge mechanism”?

The reverse charge mechanism undermines the whole basis of carousel fraud, by switching the tax liability. Under this mechanism, the customer, rather than the supplier, is liable for VAT.

The customer (if a taxable person) must report and pay the VAT, and can deduct this VAT from their taxable income at the same time.

1 : DG Taxation and Customs Union, Report 21 September 2009, Study to quantify and analyse the VAT gap in the EU-25 Member States, Reckon LLP

Richard Cornelisse is CEO of the KEY Group and worked previously as Big4 Partner in the Tax Performance Advisory and Indirect Tax Practice and blogs on Tax Function Effectiveness and Tax Control Framework developments.

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